Does Leave Accrue While An Employee Is On Leave In NZ?

If you run a small business, leave can be one of those “it should be simple… but somehow it isn’t” parts of employing staff.

One of the most common payroll and HR questions we hear is whether leave keeps building up while an employee is already away from work. In other words, if someone is on annual leave, sick leave, parental leave, or unpaid leave, do they keep accumulating entitlements in the background?

The short answer is: it depends on the type of leave, the employee’s pattern of work, and what counts as “continuous employment” under New Zealand law. Once you understand the rules, you can set your systems up properly and avoid costly corrections later.

Important: this article is general information only and isn’t legal advice. The Holidays Act 2003 is complex in practice, and the right approach can depend on the specific facts (including what’s in the employment agreement and how payroll is set up).

Below, we break down leave accrual while on leave for NZ employers in plain English, with practical examples and common traps to watch for.

Why “Leave Accrual While On Leave” Matters For Employers

Leave accrual isn’t just an HR admin issue - it affects your:

• payroll accuracy (especially around annual leave and public holidays),
• cashflow and provisioning (annual leave is a real liability on your books),
• employment compliance risk (underpayments can trigger disputes and penalties), and
• exit costs when an employee leaves and you need to pay out untaken entitlements.

It also comes up when you’re managing resourcing pressures - for example, if you’re considering reducing staff hours, you’ll want to understand how changes impact entitlements over time.

Most leave entitlements in NZ are governed by the Holidays Act 2003, and it’s notorious for being tricky in practice. The good news is that the core concepts are manageable once you separate:

• what leave an employee is entitled to, versus
• how that leave is paid, and
• whether time away affects future accrual.

What Counts As “Accruing Leave” In New Zealand?

When employers talk about leave “accruing”, they usually mean one (or both) of these things:

• Entitlement building: the employee becomes legally entitled to a certain amount of leave after meeting a milestone (for example, annual leave after 12 months’ continuous employment).
• Balance increasing in payroll: your system shows a growing leave balance over time (for example, annual leave accruing each pay period, or sick leave showing as available after it is entitled).

These two don’t always line up neatly, because the Holidays Act measures some entitlements by weeks, not hours, and eligibility is often tied to continuous employment.

Continuous employment will usually continue even when an employee is away from work (for example, on paid leave, sick leave, or parental leave). But some types of extended unpaid leave can affect how annual leave is calculated and paid.

To reduce confusion and disputes, it’s a good idea to make sure your Employment Contract clearly sets out the employee’s ordinary work pattern (days/hours) and how leave is requested and approved.

Does Annual Leave Accrue While An Employee Is On Leave?

In most day-to-day situations, yes - annual leave continues to accrue because the employee remains employed and their employment is generally “continuous” even while they’re away.

However, there are two important employer-focused nuances:

1) Annual Leave Entitlement Happens At The 12-Month Mark

Under the Holidays Act, an employee becomes entitled to at least 4 weeks of annual holidays after 12 months of continuous employment. Many payroll systems show annual leave “accruing” each pay period, but legally the entitlement is triggered at that anniversary milestone.

So if an employee takes annual leave, sick leave, or other leave during their first year, that generally doesn’t stop them reaching their 12-month entitlement date.

2) Extended Unpaid Leave Can Change Annual Leave Payment Calculations

This is where “leave accrual while on leave” gets more complex.

If an employee takes a period of unpaid leave that is longer than one week, the Holidays Act has special rules that can affect how you calculate and pay annual holidays in some situations. In practice, extended unpaid leave can change the numbers that feed into annual holiday pay calculations (including earnings-based calculations), which can mean annual holidays are paid at a different rate than you’d expect if you assume “business as usual”.

That doesn’t necessarily mean they “stop accruing” annual leave altogether, but it can affect:

• what their annual leave is worth when they take it, and
• how payroll should calculate annual leave payments correctly.

Practical tip: if someone is taking extended unpaid leave (or a mixed arrangement of paid/unpaid leave), it’s worth getting advice early so your payroll treatment matches the Holidays Act approach for that situation.

Can You Make Employees Take Annual Leave During Shutdowns Or Quiet Periods?

Small businesses often want to manage staffing during quiet periods, seasonal shutdowns, or when cashflow is tight.

You can’t simply “tell” an employee to take annual leave whenever you like - there are process requirements around agreement and notice. If you’re thinking about directing annual leave, it’s worth checking the rules first (and documenting your approach), including when you force annual leave.

Does Sick Leave Accrue While An Employee Is On Leave?

Sick leave in NZ works differently to annual leave.

Eligible employees are entitled to sick leave after 6 months’ employment (and then more each 12 months, up to the statutory cap). So the question becomes: does being on leave stop them from reaching those milestones?

In most cases, no - being on paid leave (annual leave) or being away sick does not usually break continuous employment.

So, from a practical employer perspective:

• If an employee is off sick for a period, they typically still reach their 6-month and 12-month sick leave entitlement dates.
• If an employee is on annual leave, they still reach those entitlement dates.
• If an employee is on parental leave, they are still usually continuously employed (even if not actively working).

Where you need to be careful is when an employee is on extended unpaid leave or has an irregular work pattern (for example, true casual arrangements), because eligibility and entitlement calculations can get murky if the relationship isn’t structured correctly.

If you employ casual staff, it’s worth double-checking how you’re classifying them and what they’re entitled to, because misclassification is a common cause of leave underpayment issues. The starting point is understanding Casual Workers’ Leave Entitlements.

What About “Mental Health Days”?

From an employer compliance perspective, a “mental health day” is usually treated as sick leave if the employee is unwell and meets the eligibility requirements.

That means it typically doesn’t stop other entitlements from continuing to tick over, and it should be processed like other sick leave (including your usual evidence requirements if applicable). If this comes up in your workplace, it can help to have a consistent policy approach, and to understand how a Mental Health Day Off Work is generally handled in NZ employment settings.

Does Leave Accrue While On Parental Leave, ACC Leave, Or Unpaid Leave?

This is the section where many small businesses get caught out, because extended absences are where payroll and “continuous employment” concepts get stress-tested.

Parental Leave

If your employee is on parental leave, they usually remain employed. This means:

• their employment is generally continuous, and
• they will typically still meet milestone dates for entitlements.

However, how annual leave is paid after a long period away can change. This is because annual holiday pay is calculated using statutory formulas (including earnings-based calculations), and a long period with reduced or no earnings can affect the “average” figures payroll may use. In many cases, the Holidays Act requires you to pay annual holidays at the higher of the relevant calculations, but you should expect parental leave to make those calculations less straightforward.

Practical tip: when an employee returns from parental leave, it’s worth reviewing their annual leave payments carefully before processing a big block of leave. If you’re unsure, get advice - correcting an underpayment later is usually more painful than checking it upfront.

ACC Leave / Injury Absences

Employees who are away due to injury (including ACC situations) are often still employed and may be receiving ACC payments and/or employer top-ups depending on your arrangements.

As a general principle, their employment often remains continuous, so entitlement milestones can still be reached. The complexity is again about payment calculations for annual leave and public holidays when the employee has had reduced earnings or unusual pay patterns in the relevant lookback period.

Unpaid Leave

Unpaid leave can affect leave accrual while on leave in more subtle ways.

Even if continuous employment continues, the Holidays Act provides special rules around annual leave calculations where there has been unpaid leave of more than one week.

From a business owner’s point of view, the key risks are:

• assuming “nothing changes” and paying annual leave incorrectly later,
• not documenting the unpaid leave arrangement (leading to confusion or disputes), and
• accidentally creating inconsistency between employees in similar roles.

If you’re granting unpaid leave, it’s smart to confirm the arrangement in writing (even in a simple letter/email) and align it with the employee’s employment terms.

Public Holidays, Alternative Holidays, And Time Off In Lieu: Do They Accrue While Someone Is Away?

Public holidays are another area where employers can feel like they’re juggling too many rules at once.

Here’s the simplest way to think about it:

• Public holidays don’t “accrue” like a balance (unlike annual leave or sick leave).
• Your obligation depends on whether the day would otherwise be a working day for the employee, and what the employee is doing on that day (working, not working, on leave, etc.).

If A Public Holiday Happens During Annual Leave

If an employee is on annual leave and a public holiday falls on a day that would otherwise be a working day for them, the public holiday generally takes priority - meaning it is treated as a public holiday (not annual leave), and annual leave should not be deducted for that day.

This doesn’t mean the employee “accrues” a new entitlement, but it does affect the annual leave balance you deduct and what you pay for that day.

If The Employee Works A Public Holiday

If an employee works on a public holiday and it would otherwise be a working day for them, they may become entitled to an alternative holiday (a day off later).

Alternative holidays are essentially a separate entitlement that can build up over time when staff work eligible public holidays - and yes, these can stack up in your payroll system if they aren’t taken.

Time Off In Lieu (TOIL) And Overtime Arrangements

Some businesses offer time off in lieu as a practical way to reward extra work without constantly paying overtime, but it’s important not to mix up:

• statutory alternative holidays (from working public holidays), and
• contractual TOIL (an agreed workplace arrangement for extra hours).

If your business uses TOIL, make sure it’s clearly documented and consistently applied. Having a simple written policy (or contract clause) can prevent misunderstandings later - particularly if someone leaves and expects TOIL to be paid out. A helpful starting point is understanding Time Off In Lieu and how it fits with wage and leave obligations.

Also, if you have staff regularly doing extra hours, it’s worth sense-checking your approach to Working Overtime so you don’t accidentally create an ongoing entitlement you didn’t budget for.

What Happens To Accrued Leave When Employment Ends?

Leave accrual while on leave becomes very real when someone resigns or you’re ending employment - because you may need to pay out entitlements.

Typically, when employment ends, you’ll need to ensure the employee is paid:

• any untaken annual leave (including annual holidays entitlement and potentially annual holidays pay that has accrued but not yet become entitled, depending on timing),
• any unused alternative holidays, and
• any other amounts owing under their agreement and payroll (for example, outstanding wages).

One common question is whether you can simply “pay out notice” rather than have the employee work it. That can be possible in some situations, but you need to handle it carefully so you don’t create claims around process or underpayment. If this is relevant, it’s worth understanding Payment In Lieu Of Notice in an NZ employment context.

Practical tip: if an employee has been on extended leave (especially unpaid leave, parental leave, or ACC-related absence), do an early “termination pay” calculation check before you confirm final figures. That gives you time to fix errors before they become a dispute.

Key Takeaways For NZ Employers

• Leave accrual while on leave is often “yes”, but it depends on the leave type - most paid leave and many extended absences don’t break continuous employment, but payment calculations can change.
• Annual leave entitlement generally arises after 12 months of continuous employment, even if the employee has been away on leave during that period.
• Sick leave entitlement is milestone-based (e.g. 6 months), and being on leave usually doesn’t stop employees reaching those dates.
• Extended unpaid leave can affect annual leave payment calculations, so it’s worth checking the Holidays Act approach before you process large blocks of leave or a final payout.
• Public holidays don’t “accrue” as a balance, but they can change what leave you deduct if they fall during annual leave, and working public holidays can create alternative holiday entitlements.
• Time off in lieu and overtime arrangements should be clearly documented so you don’t accidentally create inconsistent or unenforceable expectations across your team.
• Getting your contracts and leave processes right from day one protects your business by reducing payroll errors, disputes, and unexpected exit costs.

If you’d like help setting up clear employment terms or untangling a tricky leave calculation, our team can help. Reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.